Monday – Notes & Research
Stocks start the week mixed as investors look for more. Caterpillar jumped 2% on earnings beat, but Yahoo, and other technology stocks disappoint after hours relative to guidance. How will this play out in trading tomorrow is worthy of our attention. The sellers may exert some downside pressure on stocks. The level of correction/pullback discussion are getting louder. I am not saying they will be right, but if the noise gets loud enough people begin to believe in the news.
Interest rates made another move to the upside today which with the ten year bond yield closing at 1.97% and inching closer to the 2% level. This has put renewed downside pressure on bonds. It is getting interesting from the viewpoint that rotation is taking place from bonds to stocks. However, at the same time the Fed is still engaged in buying Treasury bonds to keep rates lower. The FOMC meeting starts tomorrow and the comments following could shed some light on what the thoughts of the Fed are going forward. If they announce a timeline to stop buying bonds look for yields to rise even higher. This remains a negative sector for now and the downside remains in play with rates going higher short term.
NASDAQ didn’t make an upside move despite the 2% gain from Apple. We need the upside to take place short term if the broad markets are going to continue the current uptrend off the December 28th low. Watch and remain patient short term.
What else did we learn today?
Durable goods orders jumped 4.6% in December and well ahead of the 2.3% gain forecast. Boeing showed a big increase in orders as well as other long range items. This is a positive sign for the economic picture looking forward.
Pending home sales fell 4.3% for December and well of the growth expected. The housing market has reported mixed results of late showing some timidity among buyers. If interest rates continue to tick higher that will have a negative influence as well on the housing market. Watch to see how this progresses for January.
Apple pegged $435 as the support level for now. Just shy of the $425 target we posted in November. If the stocks holds at these levels it will give a clearer picture of market strength relative to the NASDAQ index.
The questions continue to rise relative to the upside move and sustainability. If money is rotating towards risk and away from safety the upside has plenty of room to run. However, if the fear factor heats up the downside will come back into play short term. The key is short term. If the buyers believe in the longer term rotation, they will step in again on the dip or pullback short term. The key is to be disciplined and understand your objective for you put money at risk.
1) US Equities:
Stepping back from the daily views and looking at a chart of the S&P 500 index starting in September the index closed at 1465 at the high. On January 4th the index closed at 1466, meaning it had accomplish essentially nothing over that period. Today the index is at 1500 or a gain of 35 point or 2.5% in January. If that is overbought then we will have to deal with what comes short term. Perspective and logic are better seen over the longer term versus compressing the view and creating emotions we really don’t need to help our decision making. The market could use a rest, pullback, mini-correction, etc. but you have to let it play out. In order to get the selling many are looking for there will have to be a catalyst. Until that takes place keep moving forward.
The leadership looks the same as we filter through the sectors of the S&P 500 index. We find Energy in the lead after a big week on the upside, some minor selling today. Consumer Services (XLY), Industrials (XLI) and Healthcare (XLV) are moving higher as well, with some testing on Monday. The Financials (XLF) and Basic Materials (XLB) made a move to new high, but are struggling to regain their momentum. Utilities (XLU) had a good week and moved higher to regain some strength. Technology (XLK) is struggling with Apple’s earnings results, but there are still some signs of hope in the sub-sectors. The bottom line for the broad market is the uptrend remains in play and we go with the trend.
The chart below has a starting point of 11/15 which was the pivot point for the current uptrend. Still moving sideways with a drift to the upside on the chart and still attempting to make a move towards the target of 1550-1575 short term. The short term chart below (second chart) show the leadership off the lows on December 28th.
The chart below is the 28th of December starting point looking at the current leadership on the renewed push higher. Energy established itself as one of the new leaders along with Consumer Services, Industrials, and Healthcare. Technology is the one sector that remain negative or sideways at this time. If Apple will hold support as it did on Monday, the sector is still in a position to accelerate higher and provide some much needed leadership.
The VIX index closed higher today at 13.5. This is the first sign of a move higher in three weeks. It may be nothing or the start of some volatility in stocks short term. We did add a trade in VXX today and will monitor closely the move short term.
Click on link above to see the S&P 500 Mode Watch List and Model
Tracking the Indexes and Sectors of Interest:
NASDAQ Index – The index caught the Apple Flu last week, but found some stability today as Apple bounced 2%. 3130 held support and we moved back to 3154 on the day. The NASDAQ 100 index attempted to break above the 2750 resistance, but retreated into the close. I still like the upside for the index if Apple will settle hold short term. Negative earnings data out after-hours in the sector and we will see how this plays in trading tomorrow.
WATCH: QQQ – clear $67.30 resistance on the close. Entry $67.50
Dow Jones 30 Index – 13,620 level cleared on the upside was a positive. Move to a new high last week and the 14,000 level is back in plain sight. Be patient for now with the trend.
Small Caps jumped $87.50 on IWM to continue to lead the broad markets. And, Midcap Indexes showed equal moves above the $105 level on IJH. Watching the exhaustion building in both, but they continue to hold the move higher. Weigh out the risk factor at these levels currently and continuing to hold existing positions.
Financials – XLF moved above $17.20 and continues to test the move higher. Banks (KBE) and regional banks (KRE) both tested the moves higher and are holding near the high. Hold for now and watch the downside risk of the sector if the broad markets shift momentum.
WATCH: Entry $17.20 XLF. Stop @ $17
Basic Materials – XLB hit a new high and is still in a strong uptrend. This remains one of the leading sectors on the upside. Watch for any adjustments short term. Lost 1% on Monday… watch for the test of support on this move.
Retail – XRT had pushed to the $65.60 resistance or new high. Thursday the ETF continued the upside run breaking higher. We continue to watch the leadership and protect against the downside risk. One stock to watch near term is JCP to move back above the $19.50 and higher as the upside still looks ready to be in favor fundamentally.
US Dollar – The dollar remains volatile on a daily basis. The buck retreated to support at $21.70 on UUP. The test lower was a negative for the upside short term, but still watching to see how it plays out and follows the move higher off the $21.70 support?
Euro – The euro was testing lower on the rally in the dollar, but that reversed on the dollar weakness and is now above the previous high. Let this play out on the upside. Could add to the position on the test of support at $131.50. Nice move to new high at $133.55 on Friday.
WATCH: FXE – $130.80 Entry. IN PLAY – Stop = $131
Japanese Yen – Has the yen found the near term low? FXY bounced off the $108.80 low, but revisited that level on Thursday again. The question is will the bounce hold this time or continue lower? The devaluation is an attempt to stimulate exports for Japan. Still volatile, but the downside still wants to continue based on this move? Short Yen anyone? (YCS) YES! The downside move to $107.82 last week? Watch the downside continuation.
3) Fixed Income:
Treasury Bonds – The yield on the 10 year jumped Friday to 1.97% and the 30 year to 3.15%. The downside risk in Treasury bonds is in play as the talk shifts to rising rates with the Fed stepping out of the way as unemployment data improves along with the housing market.
High Yield Bonds – Testing the highs and resistance near $95 on HYG, with the upside continuing to melt higher for now. Look for support holding at $92.75. Continued to creep higher.
Corporate Bonds – LQD, iShares Investment Corporate Bond ETF is struggling to hold support near the $120.40 level. The downtrend started in October and has not settled yet again at support. Short play on LQD hit entry on Friday and them pushed lower early today and closed down slightly on the day. Downside pressure is building.
WATCH: LQD – Short @ 120.25 Entry on Friday.
The commodity sector continues to be a challenge relative to direction short term. There are sub-sectors attempting to make moves to the upside, but you have to manage your risk. This remains a traders sector for now.
UNG – More downside today as the selling accelerated off the inventory data from last week. The drop of 5% came on high volume as the bailout of the commodity continued. The bottom line for the commodity is volatility based on news and speculation.
OIL – Oil has been trading lower as the reports on oil are mixed. The close at $96.44 is push back above the $96 level. Watch the downside risk relative to an emotional reaction from investors and the speculation on demand… I don’t like the way this is shaping up short term. Manage your stop.
WATCH: ENTRY OIL is $21.70. Raise stop to 22.45.
UGA – Gasoline tested support $56.80 held and has moved higher and breaking above resistance at the $59.35. The inventory data fell unexpectedly on Thursday pushing the price higher. As we stated the news could spark a move toward the $62 target short term. It did that today with the close at $61.58.
WATCH: ENTRY: $58 UGA – Stop = $60.50 Raise stop.
GLD – Downgrade from Goldman Sachs sent the metal lower last week. Hit support at $160.20 today and we are watching the downside to see if it develops. GLL is coming into the play on the short side. Watch as the miners (GDX) have fallen more than 7% the last three days. The short side looks more attractive.
WATCH: GLD – Entry $163 – Stop $160.
DBB – Base Metals broke support, tested $18.60 low and now is attempting to move to the upside. A move through the $19.25 level would be the key short term. Be patient as the ETF has decided to test the support levels one more time?
Palladium (PALL) broke above the $69.50 high and heading higher. Cleared the $71.80 resistance on Friday.
Platinum (PPLT) remain the better bet on the precious metal side. Platinum is testing the consolidation pattern on the upside. Need to break above $167.
5) Global Markets:
The NASDAQ Global Market Index (NQGM) broke above 970 on the index and has moved to 1025. The global markets remains a positive among investors short term. Money flow into the country ETFs has improved along with the upside gain.
WATCH: EFA – The uptrend short term continues, following a small test short term the fund has moved back above the previous high. Stick with the uptrend play for now as it holds support. $58.25 support for now.
WATCH: IEV – Europe continues to rally as investors believe the worst is over. Why? Simply put the backing of the EU and the ECB (similar to the Fed in the US in 2009). The confidence that there is a back stop has brought investors back to the table. Looking at the daily chart for the last year we can see the break above resistance and the trend higher remains in play. Upside target is $45.50 going forward. Solid progress on Friday gaining 1.3% to $41.19.
WATCH: FXI – China has firmly established the uptrend off the November low. However, the volatility of the move has picked up on economic data from China. Watch as a consolidation pattern is building on the chart. Test of support at $40.85 is in play. Watch to add to position on pullback test and bounce if it develops.
ENTRY: $42 FXI – Stop = $40.
WATCH: EEM – Emerging markets have been doing well. The chart shows a consolidation pattern that is breaking lower as we closed below the 30 DMA. $43.50 is the support level to watch for now.
6) Real Estate (REITS):
The sector broke support tested lower and then reversed along with the broad indexes. The fear generated by the fiscal cliff issues sent the sector lower. The reversal is worth trading as the cliff issues are resolved short term.
WATCH: IYR – Look for reasonable entry. $64.90. The break above $66.12 was the entry point of the move above resistance. Still moving higher short term. Watch for potential test of support in the move.
ENTRY $66.15, Stop $67
WATCH: REM, NLY & SJT – all three are in a position to break higher.
7) Global Fixed Income:
The sovereign debt issues are fading as the global outlook improves. Still plenty to be concerned about relative to growth, but the fixed income side is attractive for now. High yield bonds and corporate bonds are gaining momentum short term.
WATCH: Emerging market bonds (EMB) – Looking for support and an entry opportunity from the selling. Looking for a move above the $122.10 level for the entry.
WATCH: Emerging market Sovereign Debt (PCY) – Testing support near the $31 mark short term. Watch to see if this breaks lower or offers and entry on the bounce. Pays a 4.6% dividend as well.
WATCH: International High Yield Bonds (IHY) – Tested support at $25.75 and bounced and hit new high and still moving up. HOLD.
WATCH: PAFCX – bounced off support near the $11.66 mark. Holding within the trading range for now. HOLD.
WATCH: PICB – International Corporate bonds broke higher and they are testing the current high again. HOLD.
Watch and play according to your risk tolerance on any position taken. Everyone has different trading styles and you have to find what works for you and your personality. Don’t put yourself in positions you don’t understand or take risk you can’t tolerate. Not every trade results in a profit, but controlling your risk will limit the downside losses.